A New Silicon Valley Rule? All Great Internet Cos. Build an Ad Network

Even Publishers Who've Bemoaned Networks Have One

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Tod Sacerdoti
Tod Sacerdoti
In Silicon Valley, there's an old adage that says all great internet companies eventually build an e-mail service. Nearly every major player from Google to Comcast, Facebook to MySpace, Yelp to LinkedIn, has some form of user-to-user e-mail within its site or application. Today, I propose a new maxim -- all great internet companies eventually build (or buy) an ad network.

The evidence is inescapable: Google, AOL, Yahoo, MSN, Fox, CBS, Facebook, MySpace, LinkedIn, Cox and many more all have networks of ad placements. In fact, even Forbes.com, the single most vocal publisher about the negative impact of ad networks, launched the Forbes Audience Network in late 2007.

For the purpose of this piece, I am defining an ad network as a product that connects advertisers with properties that want to run advertisements (websites, applications, etc.), typically with some form of automation and advanced targeting (site, user or geographic).

Responding to Reach
Publishers' attraction to the ad network model begins when they realize that, as a single media property, their ability to tap into advertising budgets is inherently capped. Publishers consistently hear from advertisers that they lack the reach, pricing flexibility or targeting necessary to increase their share of campaign budgets. Publishers launch ad networks as a response, and in doing so, demonstrate the inevitability of the ad network decision for an online media property.

The first question a media buyer asks a publisher is, "What is your reach within my target demographic?" Outside of a limited number of properties (12 to be exact, including Yahoo, ESPN and CNN), most media properties do not provide more than 25% reach on the internet. As a result, nearly every publisher is individually irrelevant -- they only matter in aggregate -- and, in turn, sites are forced to offer value-add inventory, custom integration or sponsorship opportunities to stay in the game.

Ad networks, on the other hand, have significantly more reach than individual publishers for nearly every target demographic. This is the reason that all the top properties in ComScore's Ad Focus report are ad networks in some form. Media properties must organically grow their audience, launch an ad network or buy an ad network to compete with those already in existence. Due to the high cost of content creation and marketing required for audience growth compared to the minimal risks of either launching or buying an ad network, most publishers opt for the latter.

Additionally, ad exchanges have a major impact on ad networks' reach, but not in the way most people expect. Ad exchanges commoditize access to inventory, significantly reduce waste and allow ad networks to pay less to reach the right user. The exchanges are technology platforms that massively favor networks (technology companies) vs. publishers (media companies). Ad exchanges largely make it that much harder for publishers to compete.

The Targeting Challenge
The second question a media buyer typically asks is, "What type of targeting do you offer within my target audience?" This query speaks to the core of the publisher's challenge, as their goal is to sell their whole audience as the target rather than slice and dice their inventory into even smaller pieces. Once the discussion delves deeper into data targeting, retargeting or performance optimization, most publishers are left with a tiny budget, if they are still on the plan at all.

On the other hand, ad networks are able to leverage their massive reach and standardized ad serving across multiple properties to better address targeting needs. By drawing inventory from hundreds of publishers, networks can precisely target audiences with more total reach than any individual publisher on the buy.

The Price Advantage
The third question a media buyer asks is, "How much does the inventory cost?" Strong publishers generally have strict pricing tiers. However, they know that a huge (and growing) portion of the ad budget for most campaigns will be placed in much more efficiently priced inventory -- sometimes as low as 10% to 20% of a media property's rate card. As a result, the publishers continue to face price pressure and a reduction in their budget share.

Ad networks don't struggle from this rate card handicap because they have much more flexibility around inventory pricing and pricing models in general. Additionally, as they grow, networks' leverage over publisher inventory often also increases, making finding efficiently priced inventory even easier. There is a lot of evidence that the larger a network gets, the more control it has over publisher inventory. I don't mean to imply that this leads to exclusives, or that networks aren't drawing from similar pools, but fundamentally, the more inventory (and total dollars) is managed by networks, the more publishers become dependent on them. In addition to the clear benefits of flexibility, publishers have long been on the receiving end of this power dynamic and understand its self-reinforcing effects.

Examples of this shift of power abound. In search, Google can basically dictate any revenue share for search deals. In display, vertical networks such as Jumpstart, Glam, Federated Media and others have increasingly gained access to more and more premium inventory in their vertical while simultaneously paying lower revenue shares. And in traditional display, Yahoo went from not working with networks, to working with networks, to buying networks. Today, their entire display ad strategy is dependent on networks working with them through their Right Media Exchange.

In addition to the above challenges, the largest media properties (Yahoo, AOL, MSN and Google) must contend with budget share issues. Essentially, no matter how strong Yahoo's behavioral targeting may be, most media buyers are uncomfortable with any one property representing more than 25% of the budget. As such, the largest properties use their internal ad networks or exchanges to get a larger percentage of the total ad budget, either by selling inventory off their core site as part of a network offering or, more commonly, by allowing external ad networks to buy the same campaign on their inventory at a reduced price.

Publishers Come Full Circle
The inevitability of publisher ad networks exposes a fascinating contradiction: The industry pundits who originally mocked ad networks are now the same publishers launching or buying ad networks. Look no further than Fox, which in 2008 began a process disallowing ad networks from selling Fox inventory to certain advertisers or buying at all on MySpace, and then proceeded to replace them with the Fox Audience Network, which is 100% owned by Fox and has aggregated inventory and data from across the FIM properties (MySpace, IGN, American Idol, etc.) to create an aggregated ad network. (Incidentally, by digging into ad tags running on Facebook, we've observed Fox also sells some Facebook inventory through the same pool).

Furthermore, publishers that have launched ad networks often see benefits beyond their ability to get more ad campaigns and control a larger percentage of the ad budget. Many gain experience with automating their media buying and trafficking processes, creating significant economies of scale from increased ad serving or sales per person. Over time, they begin to experience the benefits of increased market power, which leads to better inventory pricing and overall margin.

In the end, the adage "all great internet companies eventually build (or buy) an ad network" will be realized and this topic will no longer create such a stir. In the meantime, I recommend you come up with a generic brand name (Twitter Media Network), buy your domain name (SkypeNetwork.com), map out your differentiated ad network strategy (you can start with audience extension) or buy one of the big boys before they go public (I think Specific Media, Adconion, Adknowledge, Azoogle, Collective Media and Tribal Fusion are still available). If not, maybe you aren't such a Great Internet Company after all.

Tod Sacerdoti is founder and CEO of Brightroll, which is, you guessed it -- a video ad network. You can read more of his musings at blog.brightroll.com.
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